Tuesday, October 8, 2013

Islamic Banking in India, Do we need it?


New RBI Governor Raghurajan added one more feather in the cap of Muslim appeasement by giving nod for the establishment of Islamic banking in India starting from the state of Kerala. Last governor of RBI never favored Islamic banking and shall we assume that the new joining of our Governor came with a mandatory bond of allowing Islamic banking for our so called Secular UPA Government. It is said that Islamic Banking is as per the principles of Sharia Law and borrowing Interest on loan is considered as an evil. As per Sharia Interest is considered to be “riba” (something excessive) and has to be avoided.

Loan without interest seems an interesting term for many who are in dire need of loans but the truth is something else. It’s not like that the bank is never going to charge you any interest but truth is something else. In reality all kinds of funny procedures and practices are adopted in Islamic banking. They say that the idea is that the banker and borrower should share the profits and losses! Let us take some examples:

1) In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item (say a house), a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. You will notice that profits are alright but not “interest”! This is a long-winded way of doing simple things. Virtually how is profit different from interest and overall it’s like entry and interruption of bank into the business of a firm with or without its approval.


2) Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid). There are two sales/purchases unnecessarily in the place of one! It seems like a sweet candy with bitter taste.


3) As for home loans, another procedure is that the bank and borrower form a partnership entity, both providing capital at an agreed proportion to cover the value of the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank's share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party's current equity. I feel that such procedures are very cumbersome and we don’t need these.

4) Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. Varying interest rates from borrower to borrower, to me, is simply unthinkable.

5) Islamic banking is restricted to Islamic acceptable transactions, which exclude those involving alcohol, pork, gambling etc. So, shall we conclude that loans for gun-running, suicide bombings, drug-peddling, terrorism etc seems to be permissible as widely prevalent in Islamic countries?

6) Is interest a sin? Absolutely not, any person who had borrowed loan from a bank if bounded by interest will work hard to return it as soon as possible. Any society which has competitive atmosphere progress as it not only increases the human output but also provides better opportunities for customers. If a person is not bounded to return he will not understand the value of money. Interest is appropriate if charged wisely and appropriately and way before Islamic Sharia Code of conduct Manu Smriti defines guidelines for interest which seems quite practical.

Manu smriti 11:151-155 speaks about interest rates limit not more than 5%, renewal of contract after paying all dues, the sum interest should never be more than the original amount in any case.

I think if these guidelines are not even practical but also if honestly followed makes establishment of Islamic banking on our country irrelevant.

7)  Uncontrolled unemployment in our country and widespread corruption had lead to lakhs of skilled and semiskilled youths an easy target for luring by unethical means. Everyone is aware of Mahajan never ending Sood quest. When the bank will be partner in individual firm how could anyone escape from the same consuming mentality of lender. The National banks seems more comfortable option for such class as most of time poor fractions of society are excused from the pay back of loans by our politicians for votes. If such incentives are found in religion based banking which follows strict Sharia than anyone can imagine that at the cost of religion a debt ridden party could be easily blackmailed to go free. This will not even cause communal tensions but also destroy the secular thought process of our democracy. It will be not a big saying to say that Islamic banking is a potential danger to our society and its harmony.


8) Even if RBI is so keen in Islamic Banking than why cannot it offer same structure of payment from its own banking structure? Why does it want to introduce unknown funding from Islamic countries in Indian economy through indirect channels? Is not it loss of reputation of our own banks and loss of self reliance of Indian economy?


There are 57 countries which are members of the Organization of Islamic Cooperation (OIC). Luckily India is not a part of this Organization thanks to Pakistan’s request to exclude India due to the Kashmir issue. Islamic Banking is prevalent amongst the OIC countries with specific Islamic banks in operation, although not very extensively.

I don’t think that at this point of our history we should introduce Islamic banking based on Sharia which is against the secular fabric of our constitution. Today we opens Islamic banking , tomorrow will we open Christian banking, Jain banking, Sikh banking, Atheist banking etc and that also if we imagine this sort of division in each and every field of society it would be impossible for a country like us to run.

Dr Vivek Arya

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